World SMA Growth Seen Lagging U.S.
June 23, 2003
Internationally, separately managed accounts are growing at a steady pace, unlike the leaps and bounds their stateside counterparts are experiencing.
Money Management Executive Associate Editor Chris Frankie recently spoke with Shiv Taneja, a London-based senior analyst with Cerulli Associates, about why Cerulli projects these growth rates to continue, the differences in SMA products worldwide and the thinking of the non-U.S. investor. Taneja also explained how U.S. asset management companies have been able to expand their SMA products abroad and which corners of the world present the greatest opportunities.
MME: What is the main difference between the separately managed accounts business in the U.S. and in the international community?
Taneja: A lot of people in America get a sense that SMAs are similar internationally, but they are as different as they could possibly be.
One of the main differences is that SMAs in the U.S. grew in a linear way. Each product grew in an individual, independent silo. We're now seeing some degree of unification in the U.S., with crossovers between mutual funds and separate accounts. Internationally, firms have been offering unified managed account programs that combine the products.
Second, in the U.S. there's a huge development of separate accounts. Internationally the focus is much more on mutual fund-based programs.
The third point of differentiation is in the U.S. where there's a lot of emphasis on customization. Although there is a lot of cachet placed on the ability to customize separate account programs, the reality is no more than about 30% to 40% of the programs in the U.S. are actually customized.
Investors in Europe, and to a lesser extent in the U.K., are less focused on this issue of customization. They are far more focused on tax protection because tax rates across the Continent and in the U.K. are fairly high, so people are looking for ways to protect their investments, usually through a tax wrapper. It's a cultural thing as much as it's a practical thing. Mutual funds provide far more protection and far more tax deferral than separate accounts.
The other thing to bear in mind is the U.S. separate account business has been very much dominated by the wirehouses or the brokerage firms. Internationally what we've seen is that's not the case at all.
MME: What's the role of unified managed accounts in the marketplace?
Taneja: A unified managed account simply put is a program that includes both mutual funds and separate accounts. Conceivably, you could put anything else in there that you like, such as ETFs or hedge funds. It's pretty scalable in terms of what products could go within the construct of the unified managed account.
In the U.S., the development of separate accounts came very much in the context of institutional management - where managers were picked for specific areas of expertise. For example, you picked by style. Internationally, none of this really exists. In an international environment you would typically have a global mandate, so it cuts across all the various styles. The U.S. approach of building a unified managed account based on style has no resonance internationally. We just don't differentiate on the basis of value and growth.
In the U.K., for example, which is probably closest to the U.S. model, many firms have tried to develop the style concept here, value and growth, but to be honest, it just hasn't worked.
MME: In a recent report, Cerulli asserted that the SMA industry outside of the U.S., which was $260 billion at the end of last year, will grow to $390 billion by 2007. Meanwhile, experts are predicting the U.S. industry will jump to more than $1 trillion in that time frame. Why is the product expected to be so much more popular in the U.S.?
Taneja: There are several issues. One is the fact that managed account programs have existed in the U.S. for 25 years. There's a certain history, a certain understanding there.
The U.S. is finally coming to grips with technology. That's an absolutely crucial element of the development of separate accounts. How do you go and create the requisite hardware to develop or to produce a labor-intensive managed account program and keep it at a fairly low level of cost, given that average account sizes are falling rapidly? That's something we haven't even begun to consider in the international marketplace.
There also is a strong rationale, particularly from the separate account standpoint in the U.S., of taxation. The ability for a separate account to provide the investor with the capability to manage his or her tax liability is seen as a big advantage in the U.S.